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Children’s Healthcare of Atlanta has an immediate response — it says each year it provides hundreds of millions of dollars’ worth of services that benefit Georgia children and their families who live in all of the state’s 159 counties. Those benefits come in different forms: subsidized medical care for the poor, research to find a cure for childhood diseases, training of pediatric residents, just to name a few.
And Children’s is constantly looking at whether it is organized to meet as many of the needs of Georgia children as it possibly can, said Donna Hyland, the system’s president and CEO. “And we all know, sadly, that the needs of kids are enormous,” she said.
Look closer, though, and you’ll see that in a state where many face barriers to obtain pediatric services, Children’s has stockpiled immense wealth, The Atlanta Journal-Constitution found in an examination of the hospital system’s finances and policies.
Today, Children’s is one of the richest pediatric health care systems in the country, the AJC found. Hefty increases in net revenue from patient services over the years, combined with solid investment earnings and generous donations from fundraising, have given Children’s unrestricted cash reserves that last year stood at more than $6 billion and has grown even larger this year. In recent years, such riches at other nonprofit hospitals have prompted state and federal lawmakers to question whether the hospitals do enough for their communities to justify their tax exemptions.
One reflection of the pediatric system’s wealth is its 2019 Standard & Poor’s rating: Children’s was awarded an AA+, the only such lofty rating among the 165 U.S. not-for-profit acute health care providers rated by the agency that year. S&P noted that the rating reflected Children’s “exceptionally strong balance sheet with robust unrestricted reserve levels.”
S&P also noted that Children’s had long posted operating profit margins of more than twice that of its S&P peer group of pediatric hospitals.
With such deep pockets, critics say, the system could use more of its reserves to ease the strain on families trying to access quality health care for their children.
“It’s a big deal that they’re sitting on that amount of money with the needs that our children have,” said Del Perscilla, a medical malpractice attorney in Albany, one of the poorest regions of the state.
It even could provide free care to every child who walked through its doors for the next three years — and still have $1 billion in reserves, the AJC’s examination found. Yet the system provides relatively little free and discounted care to families who may face overwhelming bills for their children’s treatment, a key measure of whether nonprofit hospitals are serving their communities.
The system’s spending on such charity care from 2007 through 2019 was relatively flat, averaging less than $25 million a year, though last year, amid the pandemic, it reported $30 million.
Every health care finance expert who spoke to the AJC for this article concluded the system, as a not-for-profit, provided very little charity care when compared to its vast wealth.
Nancy Kane, adjunct professor of management in the Department of Policy and Management at Harvard University’s T.H. Chan School of Public Health, called Children’s charity care amounts “ridiculously low.”
“For a children’s hospital in Georgia, wow, that’s all they could do?” she said.
“The general public, or donors, would be disappointed to find out that the resources are accumulated over long periods of time and not used as given for children who cannot afford needed care and who aren’t eligible for other resources,’’ said Linda Quick, who for 22 years was president of the South Florida Hospital Association and now heads Quick Bernstein Connections Group, a south Florida healthcare and human resources consulting firm.
The AJC’s examination involved a review of 13 years’ worth of annual financial documents to determine the not-for-profit’s strategy for success as well as its commitment to providing free or reduced price care to families who couldn’t otherwise pay. It also included a review of the hospital system’s Medicare cost reports and credit-worthiness reports that provide a financial comparison of peer group hospitals across the U.S. Lastly, the AJC enlisted the assistance of some of the nation’s top health care finance and nonprofit and hospital pricing experts, who reviewed the system’s finances, tax records, charity policies and other documents.
Hyland said that Children’s wealth is dedicated to its mission and allows it to provide community benefits such as specialty pediatric services, physician training programs and child advocacy, in addition to uncompensated care. Those benefits totaled about $300 million last year, system officials said.
What’s more, she said, Children’s has transformed into a leading academic medical center, and it needs such wealth to attract and retain top researchers and to sustain its mission “for many, many generations to come.”
“It takes that kind of backing to have the size and scale of the programs that we do,” she said.
She said Children’s has relationships with pediatricians and hospitals across Georgia to make sure children receive care when they need it, without duplicating resources in other communities. It also has an emergency transport operation around the state. But she said it’s hard to fan out its medical services. “With pediatrics, you really have to look at how you do that, how you can get the workforce to do that…and how you can sustain that,” Hyland said.
“One of the things we have to balance (is) how do we most effectively use the time and talent of the very scarce physician resources that you have.”
As for criticism that the hospital system doesn’t do enough to help those who may struggle to pay bills, Children’s officials said that almost all children in Georgia are covered by either Medicaid or by private insurance.
So Hyland said the system’s definition of charity care includes both direct financial assistance for patients and its calculation of the difference between what Medicaid pays and what it costs Children’s to treat Medicaid patients. Together, those categories totaled about $158 million last year, she said.
The system’s 2019 tax filing — the most recent available — showed that it reported $238.6 million in overall community benefits. Direct financial assistance was about $29 million, while the unreimbursed costs of Medicaid services was about $101 million.
Researchers have shown, though, that the payments hospitals receive from private insurers more than cover any shortfalls in federal reimbursements through programs such as Medicaid. That means hospitals don’t bear the financial burden — insurers and other patients do in the form of higher prices.
Many Georgians have a personal story tied to the state’s premier pediatric healthcare system, whose network includes three pediatric hospitals, an urgent care center, out-patient therapy and counseling services and clinics.
Thanks to its care, many Georgia children who otherwise could have died due to trauma, organ failure and other ailments are alive today. Late this spring, Children’s recorded its 400th transplant: a new heart for 2-year-old Rynli Harris, who was abandoned by her parents in China and later adopted by a local family, according to news reports.
State Rep. Terry England, R-Auburn, chairman of the House Appropriations Committee, has his own story of Children’s care. He credits the system’s clinicians for saving the life of an infant family member, who underwent surgery at the facility to repair three holes in his heart.
But at the legislature, England is among a group of 26 lawmakers in 2019 who called for legislation that would mandate a specific charity care level at nonprofit hospitals — or at least one that could justify the federal, state and local tax exemptions that the hospitals receive.
In the face of rising public health care costs and the closures of rural hospitals, Georgia nonprofits also could shoulder more of the load in other ways, lawmakers said. Rep. Matt Hatchett, R-Dublin, has said that those nonprofits that have amassed huge amounts of cash could help more people by reducing health care prices.
But industry opposition weakened attempts, and the bill that passed just required not-for-profits to disclose the amounts they provide in charity care. Children’s was among the hospital systems supporting the transparency provision.
Still, many hospitals do very little, England said.
A hospital may count as part of its community benefits a farmer’s market it sponsors in the community to encourage the public to eat healthy fruits and vegetables, he said. “But as far as being able to say this was the reason that Joe did not become a diabetic, that’s very squishy,” England said.
“For purity, I look at charity care as being that in which the individual is getting some type of direct medical care,” he said.
Tax breaks justified?
That same debate has played out on the national level for years, as health care costs have soared and some hospital systems, like Children’s, have recorded sizable surpluses and built immense reserves.
Some members of Congress have called for tougher standards, saying nonprofit hospitals aren’t meeting enough vital community needs to justify their tax breaks.
Sen. Charles Grassley, R-Iowa, has long railed against diminishing charitable contributions by nonprofit hospitals. In 2019, he called on the IRS to scrutinize levels of financial assistance the hospitals provide. “It appears at least some of these tax-exempt hospitals have cut charity care, despite increased revenue, calling into question their compliance with the standards set by Congress,” he wrote.
To get federal tax exemptions, not-for-profit hospitals are required to operate for the charitable purpose of promoting health. The community benefit standard is the test the Internal Revenue Service uses to determine if a hospital fulfills this purpose. However, the federal government has only loosely defined standards on community benefits.
It says a significant factor in meeting the standard is providing free or subsidized care.
But the government doesn’t specify how the cost of that care should be calculated, and critics have complained that hospitals can inflate the amounts by including in their calculations costs not associated with patient care or treatment, such as building upkeep and overhead.
“The rub is really what do you do with all those fixed costs, the cost of capacity of beds, of unused facilities — how do you assign those to individual patients when determining what it costs to treat that patient,’’ said Brian Mittendorf, a professor at The Ohio State University who specializes in managerial and nonprofit accounting. “So there’s lots of flexibility there.”
Even including such costs, only a fraction of nonprofit hospitals across the U.S. provide a level of charity care that is comparable to the amount of taxes they are allowed to avoid, said Gerard Anderson, director of the Center for Hospital Finance and Management at Johns Hopkins University Bloomberg School of Public Health.
His analysis of Children’s tax break between 2010 and 2018 found it amounted to about $77.5 million a year. Over that time, based on the tax information Children’s provided to the Internal Revenue Service, the health care system provided an average of $23 million a year in charity care. Overall, Children’s charity care made up about 2% of total hospital expenses, the records show.
With all of its financial margins “off the charts” and the tax breaks it receives, Children’s doesn’t come near providing the level of care it could to those struggling to afford health care services, Kane said. “People on the board must think their purpose is to generate cash, as opposed to serve the population,” she said. “It’s not consistent with their charitable mission.”
Hospitals also have other options to meet the federal community benefit standards, and much of what they report on annual tax filings is not related to free or discounted care. For example, as Children’s has done, they can use surplus funds to advance medical training, education and research or to improve their facilities.
And the level of community benefit that should be provided is not defined, said Philip Hackney, associate professor of law at the University of Pittsburgh School of Law, whose focus is primarily on the law that governs the nonprofit tax-exempt sector of the economy, including charities.
Children’s other community benefits totaled about 12% of total expenses, according to Anderson, who analyzes financial records and tax filings to determine whether nonprofit health care systems are staying true to their charitable mission. By including those, the system’s expenses outweighed the tax breaks, he found.
That’s the refrain of Children’s officials. Looking beyond the bucket of charity care, the system “provides tremendous benefits to the state,” said Linda Matzigkeit, Children’s chief administrative officer.
However, the amounts spent on community benefits can paint a misleading picture, experts said.
Many hospitals count among their community benefits what they call the Medicaid shortfall in covering the cost of care. At Children’s, about 57% of patients are on Medicaid and in a written statement a hospital system spokesperson said that the shortfall “places a significant financial burden on healthcare systems such as ours.”
But a paper to be published early next year in an acclaimed health journal mentions that many hospitals across the U.S. are not just making up shortfalls from government programs, but receiving substantially more from private insurance to cover any gaps in payments.
“The argument that they have to do this because they have to make up for the shortfalls, it’s specious,’’ said Dr. Robert Berenson, a physician with the Urban Institute, a Washington, D.C.-based think tank and an author of the article.
“Private insurance more than offsets whatever shortfall they get from Medicaid,” he said.
Financial records show that is true at Children’s.
That’s no surprise, said Anderson. As a pediatric institution, he said, Children’s can negotiate higher rates for services than adult hospitals in a competitive market because private insurers don’t have the option to keep them out of network.
“They are the only children’s hospital in most communities, so they can charge whatever they want,” Anderson said.
Berenson echoed the point. “Nobody is going to go to the market saying, ‘No, we don’t need a children’s hospital,’ ‘’ he said. Insurers “don’t have that choice.”
Children’s also has a financial advantage in fund-raising, because the public is sympathetic to its cause. In 2019, it reported $4.1 million from fundraising events, $115 million from other contributions and gifts, and $1.7 million in noncash contributions. The prior year, Children’s reported receiving $4.3 million from fundraising events, $83 million from other contributions and gifts, and $1.8 million in noncash contributions.
Some of Children’s campaigns are carried out in shopping areas throughout the metro area. A donation station at a big box retailer in the Atlanta area displayed a poster of a girl, “Kenner,” who has a congenital heart defect. “Help kids like me get better” is a frequent plea.
All the money, Children’s say, goes right back to help children. “The more resources we have, the more we can do for kids,” Matzigkeit said.
Yet, even those with Medicaid or private insurance may struggle to obtain care, as evident with families of children who have chronic illnesses. A 2018 report on barriers to health care for Georgia children found that regardless of the kind of insurance they have, families often need to travel long distances to access pediatric care. That burden could be eased, the report says, if pediatric providers would make regular visits or provide more services to areas of high need.
Families also can struggle with co-pays and other expenses insurance doesn’t cover.
In Atkinson County, Gage Tanner was diagnosed with brain cancer at age 6. Gage, now 16, has been stabilized with a drug that is provided to the family by its manufacturer at no cost to the family. But Michael and Candace Tanner still had to take their son to Children’s for routine visits and exams.
In previous years, the family’s insurance through their employer covered some costs, though the Tanners were left with significant expenses. This year, Candace Tanner said, they were told by the hospital’s billing department they would have to pay up front for an MRI.
“I told the lady, ‘Look you act like my son’s got a cold. You know he’s got brain cancer and you’re telling me you won’t see him anymore?’” Candace Tanner said.
She said no one at the hospital called her to discuss whether the family might be eligible for charity care.
One reason some families may not be eligible for free or discounted care is because of Children’s charity care policies. Kane, the healthcare finance professor, used 2019 IRS reports and hospital charity care policies to compare Children’s policies with those of U.S. pediatric hospitals with more than 500 beds in Philadelphia, Cincinnati, Houston and Columbus, Ohio. She found that Children’s were more restrictive.
For example, Children’s caps eligibility for discounted rates at 340% of federal poverty levels, while similar-sized pediatric hospitals have a 400% cap.
“That just tells me there’s a huge need that they are not meeting,’’ Kane said.
In its statement to the AJC, Children’s Healthcare told the AJC its goal was to provide access to care through whatever coverage is available. Hyland said that the system has financial counselors who try to help kids get qualified for Medicaid or PeachCare, which also allows children to access other services they may need beyond medical care.
If a child is ineligible for Medicaid, only partially eligible or still has a financial need, Children’s says its counselors work to help “bridge the financial gap, guided by our policies, provider contract and state and federal laws.”
But Children’s 2020 financial statement acknowledges that the financial gap isn’t always bridged. It notes that a significant portion of patients who do not qualify for charity care will be unable or unwilling to pay for services provided.
So what is Children’s plan for the billions it has stockpiled?
That wealth, Hyland said, has allowed Children’s to make bold moves. Among them, she said, is the hospital under construction in Brookhaven that is set to open in 2025.
The money also has allowed Children’s to attract doctors and researchers as it has evolved into a research medical center, she said.
“As you can imagine, you can’t go recruit these top scientists to Atlanta and say we can only guarantee you that we will only be able to support you for five years, “she said. “You have to be able to show them that you can sustain their labs and the people they bring with them long term in the future, or else they aren’t going to come to Atlanta.”
She said she believes the board of trustees will want to continue to grow the research mission, as well as the education mission and advocacy. A portion of its wealth may fund and sustain those programs, she said.
Hospital officials also said they want to maintain wealth in perpetuity.
Some of that wealth has been set aside in an endowment fund which totals about $2.3 billion. That includes about $1.8 billion in unrestricted funds, and another $470 million that came with donor restrictions that Children’s must hold in perpetuity, according to an independent auditor’s report.
Children’s had adopted a policy that calls for appropriating for distribution each year no more than 5% of its endowment funds.
“We are proud of our fiscal responsibility — It is what our community expects of us. And it is how we meet the requirements of donors, our healthcare community and ultimately kids and their families,” health system officials said in a written response to AJC questions. “We are unwavering in our belief that we will help more children through expanding our care and our financial strength.”
That stance leaves critics uneasy in light of Georgia’s immense needs.
Experts told the AJC that a typical endowment comes from financial assets that are given to an institution by a willing donor who has restricted the principal to be maintained in perpetuity. It shouldn’t include profits from patient care. The strategy to stockpile that cash is unfit for an institution with an urgent purpose, such as a children’s hospital, critics said.
“This is not an endowment. This is profits off their patient care. That’s a very different source of cash,” Kane said.
Meanwhile, communities around Georgia are forced to make do.
In 2019, an estimated 197,000 Georgia children — 7.4% of those under age 19 —lack health insurance, the fourth highest total in the nation, according to a 2021 study by the Center for Children & Families of Georgetown University Health Policy Institute.
Many rural communities don’t even have a pediatrician to call in an emergency, said Kerry Trapnell, chief executive officer of Elbert Memorial Hospital in Elberton, which is near the South Carolina border.
Trapnell has been able to tap a telehealth partnership with Augusta University for children who present with a respiratory issue, like asthma, which is becoming more common among children who live in poverty.
Otherwise, he must refer those cases to Children’s in Atlanta.
“I know plenty of people around here who have children who go there for routine visits or because of an organ transplant they’ve had in the past. They have to travel to Atlanta and they have to leave,’’ Trapnell said.
“Any kind of access we could have here to routine tests, or anything would be amazing, even if it’s only two or three times a month.”
In south-central Georgia, Lisa Aldridge tried to set up an MRI exam at a closer facility than Children’s after her daughter, Lauren, was diagnosed with an aggressive and rare form of brain cancer in 2001.
Children’s insisted, though, that the exams had to be at one of its facilities.
“Their reasoning was they wanted to have the same machine to do the scan every time so the scans would be as similar as possible,” Aldridge said.
Her mother, Barbara Merritt Dockery, remembers the emotional and financial strain on her daughter and son-in-law, a local farmer. “If there would have been a local area where Lauren could have gone at times, it would have been so much better,” Dockery said.
The hardship inspired the community to band together to start the fund-raiser, Dockery said, and it continued after Lauren died in 2003 at age 9, following multiple brain surgeries and treatments, as more children in the area were found to have cancer. Since 2011, it has drawn more than $1.5 million in contributions, Dockery said.
“It’s not an affluent county – it’s mostly blue collar but they have big hearts,” Dockery said. “They can’t say ‘no’ to a child.”
Among those who have benefited is Lauren’s brother. At age 5, Jim was diagnosed with a different type of brain tumor. The family once more had to make the trips to Children’s for treatment.
“A child who is having to go back and forth to Atlanta for treatment — that takes a toll on their health,” Dockery said. “If there had been a local area where they could have gone at times… of course, we wanted them to have the best of care, and it seemed that was where the best of care originated.”
Staff writers Lois Norder and Carrie Teegardin contributed to this report. To comment on the story, contact the reporters at [email protected]
What community benefits does Children’s Healthcare of Atlanta provide?
These are the net community benefit expenses Children’s Healthcare of Atlanta reported to IRS in 2019.
Medicaid shortfall: $101.3 million
Research: $43.8 million
Financial assistance (charity care): $29.5 million
Subsidized health services, which are not means-tested: $27.6 million
Community health improvement services, such as programs to enhance public health: $23.6 million
Unreimbursed health professions education: $11.8 million
Cash and in-kind contributions for community benefit: $824,000
TOTAL: $238.6 million
Children’s 2020 tax return is not yet available.
About the organization
Children’s Healthcare of Atlanta was formed in 1998 when Egleston Children’s Healthcare System and Scottish Rite Children’s Medical Center effectively merged by creating Children’s as the controlling company for both organizations.
It includes the following organizations:
Egleston Children’s Hospital at Emory University, which operates as Children’s Healthcare of Atlanta at Egleston and provides inpatient and outpatient pediatric health care services.
Scottish Rite Children’s Medical Center, which operates as Children’s Healthcare of Atlanta at Scottish Rite and provides inpatient and outpatient pediatric health care services.
HSOC Inc. is an affiliate of Children’s that provides management, administrative, and related services to Hughes Spalding Children’s Hospital, owned by Grady Health System.
Currently under construction is Children’s Healthcare of Atlanta Arthur M. Blank Hospital, which is expected to open in 2024. Blank donated $200 million for the facility, which will be in Brookhaven.
Egleston Affiliated Services, which operates as Children’s Affiliated Services and provides immediate and urgent pediatric care services.
Egleston Pediatric Group, which operates as Children’s Pediatric Group and provides pediatric physician services.
Emory-Egleston Children’s Heart Center, which operates as Sibley Cardiology and provides pediatric cardiac physician services.
Marcus Autism Center, which provides outpatient therapy and counseling services for children with autism and other behavioral disorders.
Children’s Healthcare of Atlanta Surgery Center at Meridian Mark Plaza is a 51% joint venture with physicians to operate a for-profit outpatient surgery center.
Scottish Rite Children’s Medical Center Inc. also has a 48% interest in Premier Pediatric Providers LLC, a for-profit entity doing business as Kids Health First.
The Children’s Care Network, a collaborative system created through a partnership of community physicians that offers them access to Children’s resources and expertise, technical resources and group purchasing power cost savings.
The Children’s Health Network LLX, which is a for-profit physician-hospital organization and provides managed care contracting, claims resolution and contract compliance.
Other related organizations
Children’s Healthcare of Atlanta Foundation promotes Children’s in the community and raises financial support for through fundraising activities.
Children’s also has two special-purpose entities. Real Estate Enterprises LLC is a for-profit company for real estate transactions. Pediatric Informatics, LLC is a special-purpose, for-profit entity for information technology services provided to other health care systems.
(Source: Children’s Healthcare of Atlanta and Affiliates, Consolidated Financial Statements as of and for the years ended Dec. 31 2020 and 2019, an independent auditors’ report; corporate filing records)